Finance suggests changing the transfer-pricing rules to focus on transactions’ "economically relevant characteristics"

The consultation paper of Finance on the transfer pricing rules includes draft legislation that is under consideration.

There would be added to s. 247 a definition of "economically relevant characteristics," which will de-emphasize somewhat the contractual terms and refer inter alia to the actual conduct of the parties and their economic circumstances.

A transaction or series of transactions is to be analyzed under draft s. 247(1.1) with reference to its economically relevant characteristics, and (under inter alia draft ss. 247(1.2), (1.3) and (2.02)) if such transaction or series as so analyzed (a “delineated transaction or series”), and taking into account the options realistically available to the participants, differs from the transaction or series that would have been entered into by the particular participants had they been dealing at arm’s length in a commercially rational manner in comparable circumstances, the delineated transaction or series will be disregarded and replaced with an alternative transaction or series that comports with the facts of the delineated transaction or series while achieving an expected result that, had the participants been dealing at arm’s length in comparable circumstances, would have been commercially rational.

Example 3 illustrates how the suggested rules would operate in circumstances similar to Cameco. Canco, the group’s ultimate parent, sells product to Forco under a long-term contract renewable only at the option of Forco using a price that is between the median and the lower end of historical product pricing and is fixed other than for an inflation adjustment. The delineated transaction or series is the purchase of product by Forco from Canco in which Forco takes title to the product and resells it, and Canco performs all significant risk control activities and has the financial capacity to assume such risk. The paper states:

Positing Canco as a commercially rational party dealing at arm's length with Forco in comparable circumstances, it would have expected the opportunity to participate in the market for the product. It would not have agreed to use a fixed price based on a relatively low historical product price thereby exposing itself over a prolonged period to the downside risk that its operating costs would exceed the intra-group selling price, all the while assuming all of the MNE group's economically significant risks. Similarly, it would have retained some autonomy as to the disposition of its product over time. …

[T]he overall result of the application of proposed [s. 247(2.02)] would be the recognition by Canco of significant additional income in line with its functional profile … .

Subject to some exceptions, Finance also suggests bringing the content required in Canada's documentation requirements in line with that laid out in Chapter V (Documentation) of the OECD Transfer Pricing Guidelines, e.g., requiring Canadian members of MNE groups that are also subject to CbC reporting requirements to provide the group’s “Master File” to CRA at CRA’s request.

Neal Armstrong. Summary of Department of Finance, “Consultation on Reforming and Modernizing Canada's Transfer Pricing Rules” 6 June 2023 under s. 247(1.3).